Texas State & Local Tax Law Bloghttp://www.txsaltlaw.com/
en-us2015-03-30T14:00:00-06:00

Proposed legislation affecting Texas tax disputes: pre-hearing procedureshttp://www.txsaltlaw.com/archives/practice-procedure-proposed-legislation-affecting-texas-tax-disputes-prehearing-procedures.html
Senate Bill (S.B.) 1291, recently filed in the current session of the 84th Texas Legislature along with its identical companion, House Bill (H.B.) 4005, proposes to significantly alter the procedures applicable to the resolution of disputes involving Texas’s statewide taxes administered and enforced by the Texas Comptroller of Public Accounts. The bills’ changes would be reflected in modifications to the Comptroller’s pre-hearing procedures, in hearings held at the State Office of Administrative Hearings (SOAH) and in tax litigation in state court.

Today’s post summarizes some of the more important changes that the introduced versions of the bills would make to the Comptroller’s pre-hearing procedures. A future post will discuss the bills’ impact on SOAH hearings and court litigation. Because both bills are subject to change as they move through the state Senate and the state House during the next several weeks, Texas businesses, and their state tax counsel, should track the bills’ progress by following this link to S.B. 1291 and this link to H.B. 4005 on the Legislature’s web site.

]]>All “Bill Section” references are to sections in the introduced version of S.B. 1291.

Bill Section 3. Subsect. (b) of Texas Tax Code ann. (Tax Code) §111.009 (“Redetermination”) would be amended to increase the time for filing a petition for redetermination following an audit assessment from 30 days to 90 days. This will give taxpayers and their counsel more time to properly evaluate the facts and legal issues involved in challenging an assessment by the Comptroller’s office.

Bill Section 4. Subsects. (a) and (c) of Tax Code §111.064 (“Interest on Refund or Credit”) would be amended so that the interest rate paid on refunds, except for certain older refunds described in Subsect. (c), would match the interest rate paid by taxpayers on tax underpayments in an assessment as determined under Tax Code §111.060 (“Interest on Delinquent Tax”).

Bill Section 5. Requirements for refund claims in Tax Code §111.104 (“Refunds”) would be revised in several ways:

Subsect. (a) would be amended to expressly require the Comptroller to promptly refund any excess overpaid tax, penalty or interest remaining after crediting the overpaid amount against any other amount due and payable from the same taxpayer. Current law merely says that the Comptroller “may” refund such excess amounts and does not impose any promptness requirement.

Para. (2) of Subsect. (c) would be amended to remove the requirement in current law that a refund claim must state “fully and in detail” each reason or ground for the refund claim. The result would be that a taxpayer would only have to state “the” reason or ground for its claim.

Para. (3) of Subsect. (c) would be amended to increase the extended period of limitations for filing a refund claim after the finality of a tax determination (usually following a hearing) from 6 months to 2 years and would also apply the extended limitations period to a final notice of audit results indicating the right to a credit or that no additional tax is due. These changes would fix some procedural issues that have caused certain refund claims to be denied as being untimely.

New Subsect. (c-1) would be added to bar refund claims more than 8 years after the tax was originally due. Under current law, the period for filing refund claims usually tracks the 4-year period in which the Comptroller can make a tax assessment, so the new provision would effectively double the time for taxpayers to file refund claims in light of new developments, such as favorable administrative decisions or court opinions.

Subsect. (d) would be amended to delete the restriction in current law that refund claims for taxes found due in a jeopardy or deficiency determination are limited to the amount of tax, penalty and interest and the tax payment period for which the determination was issued.

Bill Section 6. Subsect. (b) of Tax Code §111.1042 (“Tax Refund: Informal Review”) would be amended to state that an informal review of a refund claim is an “administrative proceeding” for purposes of Title 2 of the Tax Code (the title covering statewide taxes). This change is apparently designed to keep the statute of limitations from running against additional refund items during the time when the Comptroller is informally considering a taxpayer’s filed refund claim.

Bill Section 7. New para. (4) would be added to Subsect. (a) of Tax Code §111.107 (“When Refund or Credit is Permitted”) to override the expiration of any other limitations period and allow a refund or credit at any time within 2 years after a jeopardy or deficiency determination becomes final or 8 years after the tax was originally due, whichever is later. The refund or credit would be limited to the tax reporting periods for which the determination was issued.

Bill Section 8. Tax Code §111.206 (“Exception to Limitation: Determination Resulting from Administrative Proceeding”) would be amended in 2 ways. First, the proposed legislation would add Subsect. (c-1) to limit the Comptroller’s assessment or collection suit to “items and periods for which the final determination was issued.” Second, Subsect. (d) would be amended by deleting the restriction in current law that a refund claim is limited to the items and the tax payment period for which the determination was issued.

Bill Section 9. Tax Code §111.207 (“Tolling of Limitation Period”) would make 3 changes in determining when a limitations period is “tolled,” that is, when a normal limitations period stops running, and what is covered by a “tolled” limitations period.

Para. (3) of Subsect. (a) would be amended to provide that limitations would be tolled for the period during which a redetermination or refund proceeding is pending before the Comptroller rather than only during the pendency of a hearing as provided under current law.

Current Subsect. (b) would be deleted, thereby allowing the tolling of limitations to apply to more than just the issues involved under current law’s existing tolling provisions in Subsects. (a)(1) (following a protest payment), (a)(2) (during a judicial proceeding) and (a)(3) (during a pending redetermination or refund proceeding).

A new Subsect. (c) would be added (former Subsect. (c), dealing with bankruptcy proceedings, would be re-lettered as Subsect. (b)) to provide that limitations would be tolled during the pendency of an administrative proceeding before the Comptroller or SOAH for the same period and type of tax. This provision likely would toll limitations for a refund claim based on any issues and not just those involved in the pending administrative proceeding.

Bill Section 20. The proposed legislation would also change existing pre-hearing procedures by repealing some provisions of the Tax Code:

Subsect. (c) of Tax Code §111.0041 (“Records; Burden to Produce and Substantiate Claims”) now requires a taxpayer to produce contemporaneous records and supporting documentation “appropriate to the tax or fee for the transactions in question” to enable substantiation and verification of a taxpayer’s refund claim. That requirement would be eliminated.

Subsect. (d) of Tax Code §111.0042 (“Sampling in Auditing; Projecting Assessments”) currently allows a taxpayer to show that a transaction included in a sample period is not representative of the taxpayer’s business operations; in that event, the transaction will be eliminated from the sample and separately assessed in the audit. It’s not clear what will happen after this provision is deleted, but it might require re-auditing of the entire sample and projection portion of the audit, much as is required under Subsect. (e) in current law when a taxpayer demonstrates that the auditor’s sampling method was not in accordance with generally recognized sampling techniques.

Subsect. (b) of Tax Code §111.107 (“When Refund or Credit is Permitted”) now prohibits a taxpayer from re-filing a refund claim for the same transaction or item, tax type, period, and ground or reason that was previously denied by the Comptroller. With the repeal of this prohibition, a taxpayer would be allowed to re-file a previously-denied refund claim when, for instance, there’s been a new policy, hearing decision, or court opinion that would authorize the refund.

]]>Practice & ProcedureAlan E. Sherman2015-03-30T14:00:00-06:00Tax-related bills to watch in the 2015 Texas Legislature: taxing aircrafthttp://www.txsaltlaw.com/archives/texas-sales-use-tax-taxrelated-bills-to-watch-in-the-2015-texas-legislature-taxing-aircraft.html
This past Friday, March 13th, was the last day for the unrestricted filing of bills in the current regular session of the 84th Texas Legislature (certain restrictions will make it harder to file a bill between now and the end of the legislative session on June 1st). It’s not surprising, then, that hundreds of bills were filed by the deadline, including many bills affecting state and local taxes. Most bills, including those dealing with taxes, won’t make it through the legislative process; some will, though, so this is a good time to start watching the more interesting tax-related bills. Today’s post summarizes bills related to aircraft taxation, with links to the applicable pages on the Legislature’s web site. Texas businesses, and their tax advisers, should follow those links to monitor each bill’s progress between now and the end of the session.

]]>House Bill 1458 and Senate Bill 798 (companion bills). These identical bills are companions, meaning that they have a sponsor (and, presumably, at least some support) in both the state House and the state Senate. Either bill if passed would make a relatively noncontroversial law change by extending the sales tax exemption in Texas Tax Code §151.328 as now enjoyed by commercial aircraft to services, tools and parts involved in the repair, remodeling and maintenance of aircraft used in general aviation, that is, those used by private businesses and individuals. The significance of such a broadened exemption can be best understood in the context of how the Texas Comptroller of Public Accounts (Comptroller) treats those items for sales and use tax purposes under current law, as discussed in a prior post on this site captioned “An example of why Texas is a sales tax-friendly state for aircraft repairs.”

House Bill 2294. This bill, which currently lacks a companion in the Texas Senate, is also intended to benefit general aviation aircraft by restricting some of the ways the Comptroller’s Business Activity Research Team (BART) investigates and assesses sales and use taxes on private aircraft transactions. Specifically,

BART would have to accept Comptroller-promulgated sales and use tax exemption certificates as prima facie evidence that the aircraft transaction qualified for the exemption claimed and couldn’t ask for additional documentation beyond what is necessary to show that the certificate is factually incorrect such that the exemption did not apply;

BART would have 180 days following a purchase, sale or lease of a general aviation aircraft to complete an audit related to a request for a sales and use tax exemption of the aircraft;

BART could not treat as precedential or otherwise base audit interpretations on unpublished interpretations, State Office of Administrative Hearings (SOAH) opinions or Comptroller opinions such as those published in the State Tax Automated Research System;

A “lease” would be a defined as written agreement that transferred “operational control” for “consideration” as the Federal Aviation Administration (FAA) defines those terms;

A taxpayer would be allowed to challenge an aircraft assessment, both at SOAH and in state court without requiring the taxpayer to first pay the amount assessed (now, payment is normally required before challenging such assessments in state court);

All penalty and interest would be tolled during the pendency of administrative and court challenges to aircraft assessments (currently, interest continues to accrue while assessments proceed through the administrative process); and

A prevailing taxpayer would be authorized to recover reasonable and necessary attorney fees upon a finding by SOAH or a state district court that BART’s audit determination was arbitrary and capricious.

Senate Bill 1396. This bill, which also lacks a companion House bill at the present time, would take an entirely different approach to aircraft taxation. The bill would add a new Chapter 163 to the Tax Code creating specialized sales and use taxes applicable just to aircraft and would exempt aircraft from the general sales and use taxes imposed by Tax Code Chapter 151. Readers should note that this is a big bill, running to 35 pages in the .pdf format, so it will take some time to digest. What’s more, at first glance this bill doesn’t seem particularly favorable to transactions involving general aviation aircraft, but that will have to be determined after a fuller analysis of the bill’s provisions.

Earlier today, February 27th, the Texas Supreme Court denied the Comptroller of Public Accounts’ petition for review in Hegar, et. al. v. Cirrus Exploration Company, No. 14-0292. Cirrus Exploration is one of many recent sales and use tax lawsuits involving aircraft purchases; in this case, the dispute was whether helicopter purchases were tax exempt on the basis of having been “…sold to a person using the aircraft as a certificated or licensed carrier of persons or property...” as provided by Subsect. (a)(1) of Texas Tax Code ann. §151.328 and further defined in Subsect. (a)(1) of the Comptroller’s sales and use tax Rule 3.297 (“Carriers”).

Last year, in its opinion in case No. 03-13-00036-CV, the Third Court of Appeals reversed the Travis County (Austin) district court’s judgment in favor of the Comptroller and rendered judgment for Cirrus Exploration instead. A very important aspect of that reversal was the appellate court’s conclusion that it was not required to defer to even a longstanding Comptroller policy interpretation of the agency’s own rule when that interpretation was unreasonable and inconsistent with the text of the rule. (For more about the Court of Appeals’ opinion in Cirrus Exploration, readers should take a look at a previous post on this site captioned “Today's taxpayer victory has significant implications for other Texas tax disputes.”)

]]>With today’s denial of review by the state Supreme Court, the Third Court’s opinion is both final and has precedential value in future disputes involving the same issues. That’s because Tax Code §112.001 grants the Travis County district courts exclusive, original jurisdiction over litigation involving statewide taxes, and the Third Court of Appeals generally handles appeals in cases from Travis County (refer to Subch. C (“Courts of Appeals”) of Texas Government Code Ch. 22 (“Appellate Courts”).

So, Texas aircraft buyers and their tax advisers, as well as other taxpayers faced with a “deference to the Comptroller’s longstanding interpretation” argument, should carefully review and analyze the potential applicability of the now-final appellate opinion in Cirrus Exploration.

]]>Aircraft Taxation in TexasAlan E. Sherman2015-02-27T16:30:00-06:00Texas revised franchise tax ("margin tax") litigation: what to expect in 2015http://www.txsaltlaw.com/archives/texas-franchise-tax-texas-revised-franchise-tax-margin-tax-litigation-what-to-expect-in-2015.html
We’re now a month into 2015, and so far there haven’t been any dramatic litigation developments in Texas’ statewide taxes. That may be about to change, however, as several pending appellate court cases have been fully briefed and are likely to be decided soon. There are a number of other cases at earlier stages of litigation, and some of those will probably result in appellate opinions or trial court judgments later this year. Today’s post summarizes a few of the more significant pending cases involving the revised franchise tax, the so-called “margin tax.” As indicated, each of the appellate cases has a Case Information Page that should be consulted by interested taxpayers and their state tax advisers for up-to-date information. Here are the cases to watch:]]>Hallmark Marketing Co. LLC v. Combs, et al., 13-14-00093-CV (Tex. App. – Corpus Christi-Edinburg, November 13, 2014), pet. filed. [Case Information page]

Hallmark Marketing lost this case at the Thirteenth Court of Appeals last November when the court held that the Texas Comptroller of Public Accounts’ Rule 3.591 reasonably interpreted Subsect. (b) of Tax Code §171.105, the margin tax apportionment provision. Hallmark subsequently filed a Petition for Review at the Texas Supreme Court on December 23, 2014, and the Texas Attorney General’s lawyers waived the state’s right to file a response. The case was recently sent for workup by the Supreme Court’s staff and for review by the justices.

This suit involved the question of whether American Multi-Cinema (AMC) could include its exhibition costs in calculating its cost-of-goods-sold (COGS) deduction for the 2008 and 2009 report years. AMC won the first phase of a bifurcated trial regarding using exhibition costs in the COGS calculation but lost the second phase of the trial involving what those costs actually were. Both AMC and the Texas Comptroller of Public Accounts appealed, and the case has now been fully briefed. The Third Court of Appeals recently directed the parties’ counsel to submit three paper copies of all briefs previously filed, and that’s generally an indication that the court intends to schedule oral argument in the near future.

Graphic Packaging lost, and the Texas Comptroller of Public Accounts won, on cross motions for summary judgment in state district court. The issue there was whether Graphic Packaging could elect to apportion its revised franchise tax margin for report years 2008-2010 using the Multistate Tax Compact’s 3-factor apportionment formula (based on property, payroll and sales), or whether it was required to use the single factor formula based solely on sales as specified in Texas Tax Code ann. Ch. 171. Graphic Packaging appealed, and the case is now nearly fully briefed. While the Graphic Packaging case still appears to be the lawsuit that’s the furthest along on this issue, a recent list of similar pending cases can be found from a review of the Texas Attorney General’s November 2014 Comptroller of Public Accounts Case List and Summary of Issues, current though this past January 12th (Comptroller Case List).

According to the Comptroller Case List, the issue in this state district court tax protest suit is whether the taxpayer could include certain heavy equipment transportation expenditures in calculating its Cost of Goods Sold (COGS) deduction for its 2008 and 2009 revised franchise tax reports. The administrative predecessor to the Sunstate Equipment Co. lawsuit was probably either the Comptroller’s Decision in combined Hearing Nos. 108,064 and 108,065 (2013) or in combined Hearing Nos. 107,281 and 107,282 (2013), although the confidentiality rules make it difficult to be certain of this. For now, readers should review both combined administrative hearing decisions for an analysis of the Comptroller’s stated position regarding the use of such costs in calculating COGS.

According to the Comptroller Case List, the substantive tax issue in this state district court protest suit is whether expenses of providing pre-paid telephone services/cards are eligible for the COGS deduction (the taxpayer also raised equal protection/equal & uniform taxation and Uniform Declaratory Judgment Act claims). The administrative predecessor to the Touch Tell, Inc., case was probably the Comptroller’s Decision in combined Hearing Nos. 108,113, 108,114 and 108,115 (2013), although the confidentiality rules make it difficult to know this for sure. For now, readers should review this administrative proceeding for an analysis of the Comptroller’s stated position regarding the use of such expenses in calculating COGS.

]]>Texas Franchise TaxAlan E. Sherman2015-02-02T16:00:00-06:00One down, more to go: today, the Texas Supreme Court denied review in Richmont Aviationhttp://www.txsaltlaw.com/archives/practice-procedure-one-down-more-to-go-today-the-texas-supreme-court-denied-review-in-richmont-aviation.html
Today, the Texas Supreme Court denied the petition for review brought by the Texas Attorney General on behalf of the Texas Comptroller of Public Accounts in the case of Richmont Aviation, Inc. v. Combs, No. 03-11-00486-CV (Sept. 12, 2013). There, the Third Court of Appeals at Austin had ruled that Texas Tax Code Ann. §112.108’s requirement that a taxpayer can only file suit if it first pays the assessment against it or posts a bond for twice the amount of the assessment violated the “open courts” doctrine of the state constitution. The intermediate appellate court’s opinion was big news at the time, as explained in a previous post on this site captioned “A possible game changer for bringing Texas tax disputes in the state's courts.”)]]>The denial of the State’s petition for review in Richmont Aviation means that the Supreme Court won’t be using that case to overturn the Third Court’s position on the unconstitutionality of Tax Code §112.108. That, in turn, is an important development for the opinion issued by the Third Court just one week ago in Combs, et al. v. Texas Small Tobacco Coalition and Global Tobacco, Inc., No. 03-13-00753-CV (August 15, 2014), discussed in a prior post on this site captioned “In Texas, a trade association has standing to challenge a tax statute on behalf of its members (at least for now).” That post cautioned readers that

Of course, the Texas Supreme Court could always weigh in and reverse the Court of Appeals’ position on the constitutionality of Tax Code §112.108, either in this case (if the State files a petition for review) or in Richmont Aviation. For that reason, businesses, and their Texas tax counsel, should watch for future Supreme Court action in those cases as well as in [Texas Entertainment Association, Inc., and Karpod, Inc. v. Combs, et al., No. 03-12-00527 (May 9, 2014), another case involving §112.108 that is currently the subject of a petition for review at the Texas Supreme Court].

So, while today’s action by the Texas Supreme Court in Richmont Aviation means "one down," the issue of whether or not Tax Code §112.108 is constitutional remains before the Supreme Court in Texas Entertainment Association and undoubtedly will arise in other cases reaching that Court in the future. For that reason, taxpayers, and their Texas tax counsel, should continue to watch for further developments in this area, perhaps including more definitive action by the Texas Supreme Court, when those taxpayers are preparing to challenge their state tax assessments in court.

]]>Practice & ProcedureAlan E. Sherman2014-08-22T11:00:00-06:00In Texas, a trade association has standing to challenge a tax statute on behalf of its members (at least for now)http://www.txsaltlaw.com/archives/practice-procedure-in-texas-a-trade-association-has-standing-to-challenge-a-tax-statute-on-behalf-of-its-members-at-least-for-now.html
Last Friday, the Texas Third Court of Appeals at Austin issued its opinion affirming the state District Court’s judgment in Combs, et al. v. Texas Small Tobacco Coalition and Global Tobacco, Inc., No. 03-13-00753-CV (August 15, 2014). This was the court’s latest holding to the effect that a trade association can seek declaratory and injunctive relief against a state fee (treated by court and the parties as a “tax”) on behalf of the association’s members that would otherwise be required to pay it. The earlier case that had allowed such a challenge was Texas Entertainment Association, Inc., and Karpod, Inc. v. Combs, et al., No. 03-12-00527 (May 9, 2014), involving the so-called sexually-oriented-business tax (and where the taxpayer recently filed a petition for review at the Texas Supreme Court).

In Texas Entertainment Association, the Texas Comptroller of Public Accounts, represented by the Texas Attorney General’s office, had argued that an association was barred from filing this type of suit against state officials under the doctrine of sovereign immunity “…because chapter 112 of the Tax Code requires a party challenging a tax to file a protest payment.” In Texas Small Tobacco Coalition, the Comptroller and the Attorney General, this time around referred to as the “State,” had contended that only an individual taxpayer has standing to sue under Texas Tax Code §112.108 (“Other Actions Prohibited”), and that “lawsuits by associations of taxpayers . . . are forbidden.” Just as it had earlier rejected the Comptroller’s sovereign immunity argument, the Third Court of Appeals had little difficulty in disposing of the State’s standing argument.

]]>According to the court, “…we have held that section 112.108 is unconstitutional, and that holding has not been overruled by the Texas Supreme Court.” The court cited as authority for that statement its opinion in Richmont Aviation, Inc. v. Combs, No. 03-11-00486-CV (Sept. 12, 2013), now on review at the Texas Supreme Court regarding another part of §112.108, specifically the requirement that a taxpayer can only file suit if it first pays the assessment against it or posts a bond for twice the amount of the assessment. (For more about the Richmont Aviation litigation, readers should refer to a previous post on this site captioned “A possible game changer for bringing Texas tax disputes in the state's courts.”)

Because Tax Code §112.108 presented no barrier in Texas Small Tobacco Coalition, the court held that a trade association has standing to sue on behalf of its members if the following conditions are met:[T]he members themselves have standing to sue in their own right [footnote omitted]; the interests the association is seeking to protect are germane to its purpose; and participation of the individual members in the lawsuit is not necessary, meaning the pleadings and record show that neither the claim asserted nor the relief sought require the individual members to participate in the suit. [Internal citations omitted.] When, as here, an association seeks injunctive or declaratory relief, as opposed to damages requiring a showing of individualized lost profits, the relief will inure to the benefit of the association’s members and does not require the participation of each individual member. [Internal citations omitted.]

***

Further, none of the statutes cited by the State forbids an association from bringing a lawsuit on behalf of its members to argue that a tax statute is unconstitutional, and we recently reaffirmed that a suit for declaratory relief challenging a tat statute's constitutionality can be brought by a trade association. Texas Entm't Ass'n, Inc. v. Combs, 431 S.W.3d 790, 795 & n.3 (Tex. App.--Austin 2014, pet. filed).

For now, the Third Court’s opinion in Texas Small Tobacco Coalition is good news for taxpayers that want to band together to challenge a state tax by having their trade association or other organization seek injunctive and declaratory relief from the the tax without first paying an assessment. Of course, the Texas Supreme Court could always weigh in and reverse the Court of Appeals’ position on the constitutionality of Tax Code §112.108, either in this case (if the State files a petition for review) or in Richmont Aviation. For that reason, businesses, and their Texas tax counsel, should watch for future Supreme Court action in those cases as well as in Texas Entertainment Association.

]]>Practice & ProcedureAlan E. Sherman2014-08-18T09:00:00-06:00ALERT: The Southwest Royalties case has been affirmed on appealhttp://www.txsaltlaw.com/archives/texas-sales-use-tax-alert-the-southwest-royalties-case-has-been-affirmed-on-appeal.html
Today, the Texas Third Court of Appeals at Austin affirmed a closely-watched appeal in which a State District Court denied an oil and gas producer’s claimed sales and use tax exemptions for certain above-ground and below-ground oil and gas production equipment. According to the District Court, as now affirmed on appeal, the equipment was not used “in manufacturing” within the meaning of Tex. Tax Code Ann. §151.318. The case is Southwest Royalties, Inc. v. Combs, et al., Third Court of Appeals No. 03-12-00511-CV.

]]>Texas Sales & Use TaxAlan E. Sherman2014-08-13T10:00:00-06:00Texas may soon end its "trailing nexus" treatment for out-of-state sellershttp://www.txsaltlaw.com/archives/texas-sales-use-tax-texas-may-soon-end-its-trailing-nexus-treatment-for-outofstate-sellers.html
The Texas Comptroller of Public Accounts is currently circulating drafts of proposed sales and use tax rule changes for informal comments from interested tax practitioners. Most of the drafts are very detailed and will require careful review to determine how particular provisions will help – or hurt – a specific business or industry. Today’s post is about the Comptroller’s intention to end “trailing nexus,” a draft proposal that should be especially helpful to certain out-of-state sellers of taxable items to Texas customers.

]]>The current rule. “Trailing nexus” (sometimes called “deemed nexus”) is used by several states, including Texas, to require out-of-state sellers that formerly were “engaged in business” in a state (that is, that had sales and use tax nexus with the state) to continue to collect and remit those taxes to the state on taxable sales made to in-state customers after nexus has ended. “Trailing nexus” has long been tax policy in Texas and is currently embodied in the second sentence of Subsect. (b)(2) of State Sales and Use Tax Rule 3.286, the rule that describes who must have a sales or use tax permit. Here’s the full text of existing Subsect. (b)(2) with the second sentence underscored:

(2) Out-of-state sellers. Each out-of-state seller who is engaged in business in this state must apply to the comptroller and obtain a tax permit. An out-of-state seller who has been engaged in business in Texas continues to be responsible for collection of Texas use tax on sales made into Texas for 12 months after the seller ceases to be engaged in business in Texas.

The draft proposal. The circulation draft of proposed rulemaking says that the Comptroller intends to eliminate “trailing nexus” by deleting the second sentence of Subsect. (b)(2). The Comptroller’s explanation for this change is set out in the preamble to the draft:

<p>Subsection (b)(2) is amended to delete the statement that an out-of-state seller who has been engaged in business in this state continues to be responsible for collection of use tax on sales made into this state for 12 months after the seller ceases to be engaged in business in this state. The comptroller has determined that this requirement, which is sometimes referred to as "trailing nexus" or "deemed nexus," is contrary to the physical presence test articulated in Quill v. North Dakota, 504 U.S. 298 (1992). The paragraph is further amended by adding a statement that an out-of-state seller will only be responsible for collection of Texas sales and use tax through the end of the reporting period in which the seller ceases to be engaged in business in this state. An out-of-state seller will also be required to maintain, for at least four years after the out-of-state seller ceases to be engaged in business in this state, all records required by subsection (j) of this section, including sufficient documentation to verify the reporting period in which the out-of-state seller ceased to be engaged in business in this state. The comptroller intends that this proposed amendment be effective retroactively.

Observations. The Comptroller’s plan to end “trailing nexus” for out-of-state sellers that have ceased to be engaged in business here is plainly correct, and for precisely the reason given in the preamble of the draft proposal. That is, at least since its 1992 Quill opinion, the U.S. Supreme Court has interpreted the federal Constitution’s Commerce Clause to require a seller to have a physical presence in a state in order for the state to constitutionally impose its use tax collection obligations on that seller. If the Comptroller ultimately adopts this draft proposal, the Court’s interpretation will now be followed in Texas. What’s more, according to the draft’s preamble, the rule amendment would be effective retroactively.

The takeaway. Out-of-state sellers that are currently within a 12-month “trailing nexus” period and are thus collecting and remitting Texas use taxes on sales to in-state customers should watch for the future publication of an adopted amendment to Rule 3.286 that deletes the second sentence of Subsect. (b)(2) on a retroactive basis. When that occurs, those sellers should be able to stop collecting and remitting this state's use tax from that point forward (or at least from the point following the end of the reporting period in which the seller ceased to be engaged in business in this state).

]]>Texas Sales & Use TaxAlan E. Sherman2014-07-30T06:00:00-06:00An update on three state tax cases pending at the Texas Supreme Courthttp://www.txsaltlaw.com/archives/texas-taxes-in-brief-an-update-on-three-state-tax-cases-pending-at-the-texas-supreme-court.html
A number of state tax cases are currently pending in the Texas courts, including three important ones now docketed at the Texas Supreme Court. In each of those cases, it was the Texas Comptroller of Public Accounts, represented by tax lawyers from the Texas Attorney General’s office, that filed petitions for review after losing in the intermediate appellate court. Curiously, those three cases share the same – and relatively rare – feature: the winning taxpayers all waived their right to respond to the Comptroller’s petitions for review, but the Supreme Court asked them to file responses anyway. Apparently the Court wanted to hear from the taxpayers’ lawyers before deciding whether or not to consider the complex tax issues involved in those cases.

(Other taxpayers, and their Texas tax counsel, shouldn’t assume that the Court’s request for a response means that it is inclined to grant a petition. In fact, in tax cases that have reached it during the past several years, the Court has generally denied petitions for review whether or not the winning party has filed a response on its own or at the Court’s request.)

With that background, here’s a quick look at the three pending tax cases where the Texas Supreme Court recently requested taxpayer responses to the Comptroller’s petitions for review:

]]>Combs, et al. v. Titan Transportation, LP, No. 14-0307 (Petition filed 5/28/14). This case under the revised Texas franchise tax, the so-called “margin tax,” involves the question of whether Subsect. (g)(3) of Texas Tax Code ann. §171.1011 allows the exclusion of certain subcontracting payments from total revenue. For more details about the case, readers should refer to previous posts on this cite captioned “Three appeals to watch in pending Texas tax litigation” and “Another franchise tax win for a Texas taxpayer.” For the parties’ filings and other developments at the Court, readers should check the case information page on the Supreme Court’s web site.

Readers should also note that the Court, acting pursuant to Rule 55.1 of the Texas Rules of Appellate Procedure and without first formally granting the petition for review, requested and has now received briefs on the merits from both Richmont Aviation and the Comptroller. Those briefs, as well as other filings and developments at the Court, can be found on the case information page on the Supreme Court’s web site.

]]>Texas Taxes in BriefAlan E. Sherman2014-07-16T06:00:00-06:00Another twist in calculating the apportionment factor under the Texas margin taxhttp://www.txsaltlaw.com/archives/texas-franchise-tax-another-twist-in-calculating-the-apportionment-factor-under-the-texas-margin-tax.html
A pending state court appeal involves an interesting - and important - question of how the revised Texas franchise tax, the so-called “margin tax,” should be calculated. Specifically, the question on appeal is what figure should be counted in a taxpayer’s “gross receipts from its entire business” for apportionment purposes when the taxpayer incurs both gains and losses on sales of investment or capital assets in the same year that it also has other types of gross receipts. The case is Hallmark Marketing Company, LLC v. Combs, et al., No. 13-14-00093-CV, Texas Thirteenth Court of Appeals (Corpus Christi).

As a reminder, when the Texas Legislature revised the franchise tax in 2006, it left the apportionment formula essentially unchanged. Now, just as under prior law when the tax was measured by a taxpayer’s apportioned “earned surplus,” Tex. Tax Code ann. §171.106 provides that “margin” is apportioned by a fraction, the numerator of which is a taxable entity's gross receipts from business done in Texas and the denominator of which is the entity's gross receipts from its entire business, as determined under Tax Code §171.105. Subsect. (b) of the latter provision, in turn, continues to state that “If a taxable entity sells an investment or capital asset, the taxable entity's gross receipts from its entire business for taxable margin includes only the net gain from the sale.” (Emphasis added.) It’s that “net gain” language that’s at the heart of the dispute in Hallmark Marketing.

]]>The Comptroller’s old and new administrative interpretations.

Even though the Tax Code’s apportionment formula under the margin tax remained essentially as it had been under prior law, in 2007 the Texas Comptroller of Public Accounts adopted a rule that significantly altered the agency’s prior, and longstanding, interpretation of that formula.

That is, under Subsect. (e)(3) of the Comptroller’s prior Rule 3.557 (“Earned Surplus: Apportionment”), adopted in 1992, net gains and losses from sales of investments and capital assets had to be added together to determine the total receipts from such transactions; importantly, if the combination of net gains and losses resulted in a net loss, the corporation was required to report zero gross receipts from such transactions. However, under Subsect. (e)(2) of Rule 3.591 (“Margin: Apportionment”), originally adopted to be effective January 1, 2008, if such a combination of net gains and losses itself results in a net loss, the taxable entity should net the loss against other receipts, but not below zero. The impact of the different statutory interpretations under the new rule compared to the old one can be readily understood in the context of Hallmark Marketing’s facts.

Hallmark Marketing’s situation.

According to the parties’ briefs filed to date at the Court of Appeals, netting lines 8 and 9 on the 2007 consolidated federal income tax return of Hallmark Marketing and its subsidiaries (e.g., Hallmark Cards and certain other entities) resulted in a net loss. Hallmark Marketing, reasoning that it had no “net gain” from sales of investment and capital assets in 2007, filed its combined Texas franchise tax report for the 2008 report year by applying zero from those sales to the rest of its gross receipts for apportionment purposes, just as the company would have done under the Comptroller’s longstanding interpretation of the “net gain” language in Tax Code §171.105(b) (e.g., as provided in former Rule 3.557(e)(3)) .

The Texas Comptroller’s position.

On audit, and in court, the Comptroller’s position has been that Hallmark Marketing was required to follow the language of Rule 3.591(e)(2) and apply (or “subtract”) the full net loss sustained on its investment and capital asset sales in 2007 against its and its combined group’s other gross receipts for that year. The difference in treatment is not just academic: under Hallmark Marketing’s approach, its Texas apportionment factor was 5.54%. The Comptroller’s approach, on the other hand, yielded a factor of 6.49%. That larger factor resulted in the $211,974.96 liability that Hallmark Marketing is now contesting at the appellate court.

Further developments.

Hallmark Marketing’s appeal has been fully briefed, and neither the company nor the Comptroller has asked to present oral argument. For that reason, the appellate court could issue its opinion sooner than might otherwise be expected. Businesses in similar circumstances, and their Texas tax advisers, should therefore regularly check the court’s Case Information page for further developments in this important case.

]]>Texas Franchise TaxAlan E. Sherman2014-06-04T06:00:00-06:00The Texas Comptroller's latest court appeal involves the taxability of a wellbore videohttp://www.txsaltlaw.com/archives/texas-sales-use-tax-the-texas-comptrollers-latest-court-appeal-involves-the-taxability-of-a-wellbore-video.html
[UPDATE 5/26/14: Just two weeks after its initial filing at the Third Court of Appeals, the Texas Comptroller of Public Accounts decided to drop its appeal of the lower court’s decision in Combs, et al. v. EVO Incorporated, Court of Appeals Number 03-14-00293-CV. The state’s Unopposed Motion to Dismiss Appeal filed on May 21st didn’t elaborate on the Comptroller’s reasons for dismissing the case. It merely said that the “Appellants (the Comptroller and the Texas Attorney General, a statutorily-required party in tax cases) no longer wish to pursue this appeal.”

Assuming the Court of Appeals grants the state’s motion and dismisses the appeal, the lower court’s judgment will then become the final word regarding the taxability of Evo’s downhole services. However, because a trial court’s judgment is generally not binding precedent, it’s unclear how the Comptroller’s office will treat sales of the same types of downhole video services performed by other businesses. Hopefully, the agency will quickly clarify its position, in fairness to those other businesses as well as to their customers.]

Back in February, a State District Court in Travis County, Texas, decided that, for sales and use tax purposes, the sale of a video taken inside an oil or gas well was the sale of a nontaxable service rather than a taxable sale of tangible personal property (refer to the prior post on this site captioned “A Texas court has decided that a “wellbore video” is a nontaxable service”). It took a bit longer than usual, presumably because of post-trial procedures, but late last week the Third Court of Appeals at Austin notified the parties that the Texas Comptroller of Public Accounts has filed a notice of appeal in the case, now styled Combs, et al. v. EVO Incorporated, Court of Appeals Number 03-14-00293-CV.

]]>To the extent that EVO Incorporated involves a “mixed transaction,” that is, a sale of both a service and of tangible personal property, its sales and use tax treatment must be determined under the “essence of the transaction” test that applies to all such transactions in this state. That test, in turn, is based on what the seller’s customer actually wants. Because the taxpayer, EVO, won at trial, it will be interesting to see what arguments the Comptroller advances on appeal. That is, how will the Comptroller assert that EVO’s customers weren’t seeking information from inside the wellbore (obtained by the performance of a nontaxable service) but instead wanted the resulting DVD or other physical media containing that information (i.e., taxable tangible personal property)?

All businesses that similarly engage in “mixed” sales of services and property in Texas can and should follow the progress of the Comptroller’s appeal on this page on the appellate court’s web site.

]]>Texas Sales & Use TaxAlan E. Sherman2014-05-26T06:00:00-06:00Another pending Texas tax appeal to watchhttp://www.txsaltlaw.com/archives/practice-procedure-another-pending-texas-tax-appeal-to-watch.html
A recent post captioned “Three appeals to watch in pending Texas tax litigation” mentioned some important tax cases that the Texas Comptroller of Public Accounts lost in court and is now appealing. To be fair, it should be noted that the Texas Attorney General’s tax lawyers who represent the Comptroller in court have also won several important cases that are being appealed by the taxpayers involved. One of those cases is Graphic Packaging Corporation v. Combs, et al., which addresses apportionment under the revised Texas franchise tax, the so-called “margin tax.” Here’s a summary of the case and a recommended course of action for similarly-situated businesses:

Graphic Packaging is the Texas version of a California case, Gillette Co. v. Franchise Tax Board, decided by one of that state’s intermediate appellate courts and now on appeal to the California Supreme Court. In Gillette Co., the intermediate appellate court held that California, as a member of the Multistate Tax Compact (MTC) during the relevant time period, had to allow Gillette to elect the MTC’s 3-factor apportionment formula (with equal weight given to property, payroll and sales) in calculating its California net income tax. For Gillette, using the MTC formula rather than the state’s standard apportionment formula containing a “double weighted” sales factor meant a lower tax liability in California.

Because Texas is also an MTC member, many businesses have argued that they should be allowed to calculate their margin tax using the MTC’s 3-factor formula rather than the single-factor sales-based apportionment formula contained in Tex. Tax Code ann. §171.106. As in California, applying the MTC apportionment formula rather than the Texas formula would result in a smaller margin tax liability for businesses with substantial sales here but little in-state property or personnel. However, to date the Comptroller has uniformly rejected that argument in hearings following audit assessments and refund claim denials; see, for example, the 2013 Comptroller’s Decision in Hearing No. 107,937, et al., and the other hearing decisions cited there.

The tax stakes in Texas.

According to the Attorney General’s February 2014 Comptroller of Public Accounts Case List and Summary of Issues, as of this past March 24th there were 14 pending lawsuits containing Gillette Co. apportionment arguments, with each case involving substantial tax amounts for the years in issue. Graphic Packaging alone, the case that's currently the furthest along in the Texas courts, involves a combined claim of $1,019,122.00 for tax paid for the company's franchise tax report years 2008 (refund), 2009 (refund) and 2010 (assessment). For more information about Graphic Packaging, readers should take a look at the probable administrative predecessor to the court case, the Comptroller's Decision in Hearing Nos.106,503, 106,734, and 106,735 (2012).

What to do now.

At a minimum, multistate (and multinational) businesses with substantial sales into Texas but relatively few assets and personnel here should consult with Texas state tax counsel about filing protective refund claims for their margin tax paid or assessed for report years not yet barred by the state’s statute of limitations.

]]>Practice & ProcedureAlan E. Sherman2014-05-05T06:00:00-06:00Three appeals to watch in pending Texas tax litigationhttp://www.txsaltlaw.com/archives/texas-taxes-in-brief-three-appeals-to-watch-in-pending-texas-tax-litigation.html
A previous post on this site captioned “Another franchise tax win for a Texas taxpayer” observed that “It’s not been a happy couple of years for the Texas Attorney General’s tax lawyers who’ve represented the Comptroller of Public Accounts in state court tax litigation.” True enough, but we lawyers don’t like to lose our cases and, when we do, we appeal. And that’s what the State’s lawyers are doing in several important cases. Here’s a brief rundown of three recent appeals to watch:]]>Combs, et al. v. Cirrus Exploration Company. After losing this sales and use tax refund case at the Third Court of Appeals in February, as discussed in “Today's taxpayer victory has significant implications for other Texas tax disputes,” and then having its motion for rehearing denied last month, the State decided to seek further review at the Texas Supreme Court. That Court recently granted the Attorney General’s motion for an extension of time until May 21st to file a petition for review on behalf of the Comptroller.

Titan Transportation, LP, v. Combs, et al. According to the Attorney General’s extension motion in Cirrus Exploration, the State has also decided to seek Texas Supreme Court review of this refund case that it lost at the Third Court of Appeals. As briefly mentioned in “Another franchise tax win for a Texas taxpayer,” the case involved an aspect of calculating the revised franchise tax, the so-called “margin tax.” Unless the due date for the State’s petition is extended, it’s scheduled to be filed by next Monday, April 28th.

Combs, et al. v. Fair Isaac Corporation, Court of Appeals No. 03-14-00124-CV. According to the Attorney General’s February 2014 Comptroller of Public Accounts Case List and Summary of Issues, current through March 24, 2014, this sales and use tax protest suit involved the question of “Whether certain computer programming services qualify as custom software.” The State lost the case in the trial court, and on March 5th the Third Court of Appeals sent out its notice to the parties of the State’s appeal. For more details about the substantive issues in the litigation, refer to the Comptroller’s Decision in Hearing No. 102,940 (2011), the probable predecessor administrative proceeding. There, the Comptroller prevailed because the taxpayer hadn’t proven that its custom computer coding satisfied the agency’s requirements for nontaxable custom software, namely that the coding (1) transferred exclusive rights to a program from the taxpayer to its customer, and (2) constituted a computer program that the taxpayer developed from scratch.

]]>Texas Taxes in BriefAlan E. Sherman2014-04-22T06:00:00-06:00An upcoming legislative hearing on Texas tax policy and the technology industryhttp://www.txsaltlaw.com/archives/texas-taxes-in-brief-an-upcoming-legislative-hearing-on-texas-tax-policy-and-the-technology-industry.html
Technology is an important industry in Texas. The Speaker of the State House of Representatives, Joe Straus, recognized that fact when he issued an interim charge earlier this year to the House Committee on Ways and Means, together with the Committee on Technology, to “Review state regulatory and tax policy to ensure that investment in technology infrastructure, goods, and services is unfettered and that Texas is able to capitalize on innovation to fuel additional job growth, business expansion, and investment.” The House Committees plan to take up that charge in a joint public hearing scheduled at the Capitol later this week.

According to the Ways and Means Committee’s published Notice, the hearing will be held in Room E2.010 of the Capitol on Thursday, April 24th, beginning at 10:00 a.m. Anyone planning to attend the hearing in person to testify or observe should re-check the Ways and Means Committee’s meetings page for any last minute changes to the time or location. Also, for those not attending, a live broadcast of the hearing should be available over the Internet, and a link to the broadcast should be available on the hearing date on the House’s video/audio web page.

]]>Texas Taxes in BriefAlan E. Sherman2014-04-21T06:00:00-06:00Comptroller Candidate Mike Collier: Reforming the Tax Administration functionhttp://www.txsaltlaw.com/archives/personal-notes-comptroller-candidate-mike-collier-reforming-the-tax-administration-function.html
The race to be the new Texas Comptroller of Public Accounts is between two candidates: Mike Collier, CPA, a Democrat, and State Senator Glenn Hegar, a Republican. Mr. Collier has announced a specific plan for reforming the Comptroller’s tax administration function, so today’s post covers his plan. Senator Hegar’s plan, when released, will be addressed in a future post.

The full text of Mr. Collier’s tax administration reform plan appears after the jump, followed by a few comments. Readers are also invited to submit their questions and comments, either in the “Comments” section at the end of this post or by direct email (refer to the “Contact” page on this site for the email address). Comments will be passed along to the candidate, with or without attribution as requested.

Reorient (and reorganize if necessary) the leadership of the audit, tax policy, and hearings divisions to achieve a high degree of coordination, which is essential to the efficient functioning of the department, rather than the “silo” mentality we find today which results in uncertainty, unnecessary disputes, and drawn-out resolutions.

Emphasize independent review of audit results as the most efficient “first line of defense” against a costly and time consuming settlement through administrative law proceedings or the courts system.

In the event a matter goes to the administrative law judge, accept the judge’s findings as to facts and conclusions to the fullest extent possible and seek to avoid drawn-out and costly litigation.

When a settlement is reached, whether through independent review, administrative law, or the courts, allow that settlement to serve as precedent to the fullest extent possible.

Reward agency employees for having the courage to make decisions, and prevent internal turf battles from leaving decision makers feeling paralyzed.

Comments on Mike Collier’s Tax Administration reform plan.

The plan. “Reorient (and reorganize if necessary) the leadership of the audit, tax policy, and hearings divisions to achieve a high degree of coordination….”

Comments. Many issues that arise in one part of the Comptroller’s tax administration function carry over to another part. For example, an auditor in the Audit Division or an attorney in the Hearings Section will often encounter a question of how to apply an administrative rule to a particular aspect of a taxpayer’s business. What the auditor or attorney should do in that situation, and what many (but not all) do, is bring the question to the attention of the Tax Policy Division so that the rule can be uniformly applied to other, similarly situated taxpayers. This aspect of Mr. Collier’s plan, to coordinate those three tax administration functions, will go a long way toward emphasizing fair and evenhanded application of the tax law to all businesses operating in Texas.

The plan. “Emphasize independent review of audit results….”

Comments. The Comptroller currently offers taxpayers an independent audit review (IAR) conference, as described in the agency’s publication titled “Contesting Disagreed Audits.” An informal IAR conference, as Mr. Collier correctly observes, is in principle an excellent and cost-effective way to resolve disputed audit issues. However, despite the availability of those conferences, a large and growing number of tax disputes have moved on to more formal and costly administrative hearings. Hopefully, this aspect of Mr. Collier’s plan, to provide truly independent review of audit results, will help all taxpayers to realize the great potential benefits of IAR conferences.

The plan. “In the event a matter goes to the administrative law judge, accept the judge’s findings as to facts and conclusions to the fullest extent possible….”

Comments. This part of the plan refers to an issue discussed in a prior post on this site captioned “A proposed Tax Tribunal for Texas,” namely, the Comptroller’s alteration of findings of fact and conclusions of law contained in proposals for decision issued by the administrative law judges at the State Office of Administrative Hearings (SOAH). While the Comptroller doesn’t do that very often, it happens often enough that businesses, their tax advisers and, as mentioned in the above post, at least one major taxpayer trade association have taken notice. As a result, a growing number of businesses that can afford to do so have begun bypassing the administrative hearings process altogether by paying their assessments under protest and taking their cases directly to state court.

Court litigation takes the most time and is the most expensive method for resolving tax disputes, as Mr. Collier notes. That imposes a burden on all businesses, but especially so on smaller ones. It’s those small businesses, often family owned and operated, that have great difficulty paying a large audit assessment up front in order to go to court to avoid the risk that the Comptroller will change a decision because it favors the taxpayer. This part of Mr. Collier’s plan, to abide by a SOAH administrative law judge’s findings of fact and conclusions of law to the maximum extent possible, and regardless of who wins, would go a long way toward restoring taxpayer confidence in the fairness of the overall administrative hearings process.

The plan. “When a settlement is reached, whether through independent review, administrative law, or the courts, allow that settlement to serve as precedent to the fullest extent possible.”

Comments. The Comptroller has long favored settling tax disputes; e.g., Subsect. (a) of Rule 1.22 of the Comptroller's Rules of Practice and Procedures ("Oral and Written Submission Hearings") expressly states that, in the case of administrative proceedings, "It is the agency's policy to encourage resolution and early settlement of all contested matters." However, as the Comptroller has also pointed out in a taxability letter ruling, "Case settlements with other taxpayers do not create a binding precedent because there is no substantive decision based on the merits of the contentions."

Under this aspect of Mr. Collier's plan, making settlements precedential to the extent possible, taxpayers can be more confident that their settlements are substantially the same as settlements that the Comptroller has entered into with other, similarly-situated taxpayers.

The plan. “Reward agency employees for having the courage to make decisions, and prevent internal turf battles from leaving decision makers feeling paralyzed.”

Comments. Many tax practitioners and their clients are concerned about lengthy waits before receiving responses or other actions from the Comptroller’s office, particularly in the case of requests for taxability letter rulings and during the pre-hearing phase of administrative redetermination proceedings. To the extent that the delays have been the result of internal agency “turf battles” or other forms of gridlock, this part of Mr. Collier’s plan could benefit all taxpayers by incentivizing Comptroller employees to act in a timely manner.

An additional suggestion. One thing the Comptroller’s tax administration function needs is greater transparency. As a public agency serving the people of Texas, documents produced by the Comptroller’s office should be readily and easily available, preferably via the internet. One way to do that would be to publish all, and not just some, documents on the Comptroller’s State Tax Automated Research System (STARS) database accessible on the "Texas Taxes" page of the agency’s web site, the Window on State Government. Those published documents would include taxability letter rulings, administrative hearing decisions, precedential settlements as discussed above, and similar tax-related documents. That type of ready access to tax interpretations via STARS has long been the Comptroller’s practice, and Mr. Collier should consider re-energizing that practice for the future.